The election and your money
The NZ election and your cash
Elections are happening soon in both NZ and the US. In case you’re wondering why we mention the US, that’s because it’s the home to the world’s largest financial markets. The US is also the wealthiest nation by some way, and is the home of the most-used currency. This means any major events, such as an election, can have a significant flow-on effect to the rest of the world.
Over the short-run, investments such as KiwiSaver could be impacted by election-related uncertainty. While investment markets are considered rational and should focus on fundamentals like economic growth and corporate earnings, the participants in investment markets are people, so they can be startled by surprises they hadn’t considered or situations they thought were unlikely to happen. Several years ago, the sharp reactions to the United Kingdom’s unexpected vote to leave the European Union (BREXIT) is a classic example of a negative surprise. However, investors soon looked past the surprise, re-evaluated the likely impacts on company earnings, and adjusted their expectations accordingly. After a few days of unpredictability, investment markets recovered. Investors who sold in panic were left behind.
During the twists and turns of a campaign trail, it might be tempting to trade markets (that is, regularly buy or sell some investments such as shares) or change your portfolio one way or another – including changing fund choice on KiwiSaver. If you do this, it’s easy to end up on the wrong side of volatility. Market reactions can also often be the opposite to what people might expect.
Election-time - market predictions
Predictions about elections and the share market often focus on which party or candidate might be “better for the market”. In this regard, NZ seems unique as not much difference exists between the major two political parties – in particular, they both seem to agree that:
- Taxpayer and debt-funded government spending will assist the recovery (noting this debt will need to be repaid by future taxpayers),
- Broadly, NZ cannot “tax itself wealthy” and while there are some differing approaches to income taxes, neither of the main parties are planning major tax reforms or tax increases,
- Long-running housing affordability woes can be at least partially solved by partly reforming onerous consent and planning regulations, and
- NZ should continue the strategy of elimination of Covid-19. This means the likelihood of NZ’s borders being opened in any large-scale manner is some time away.
Here at Milestone Direct, we’re proudly apolitical – we don’t have any political leanings or ties. For the avoidance of doubt, that means whether the main parties agree or disagree on the points above is none of our business! That said, we have heard many comments from investing and business professionals noting that most NZ politicians don’t seem to offer substantial solutions on how NZ can fill the economic void that closing our borders and reduced global appetite for travel has created – such as; no immigration, no tourism, and no international students attending NZ universities. NZ has economically performed well in recent years, though now our economy and society are likely to be on a different path because of the pandemic, and most political leaders don’t seem to have adjusted to the ‘new normal’. This may not mean anything for most readers such as individual investors, but may mean something when it comes to career choices, because some fields are challenged while others thrive. Learn more:
- Jobs for a bad economy,
- The 10 best office jobs in a recession – according to Microsoft, and
- Three ways to make six figures.
Remember: there are no rules in politics
“War has rules, mud wrestling has rules… Politics has no rules.” Ross Perot
In the run-up to elections we’ll be bombarded with one-liners and slick promises from politicians. During such a time, political candidates are notorious for an approach known by many names, including: lolly scrambles, pork barreling, and buying votes. These terms all mean the same thing: the party and candidates campaign on spending taxpayer funding on localised projects, regions, or segments of the population – in exchange for the votes of the people who would benefit the most, thus “buying” their votes.
Sometimes, concern about these and other election promises can lead people to make investment decisions or other financial and life changes during the election campaign. Such concern and changes are mostly unfounded, as despite the slogans, campaign promises commonly end up unimplemented and things return to the long term status quo.
Keep things in perspective
Elections this year have the backdrop of a global pandemic, and as major sectors of our economy are nearly at a standstill, it is understandable that emotions might be running a little hot for many Kiwi voters. It’s worth remembering that the governments of small nations all over the world, including NZ, have less influence over real world events than we might first think. Most of these things are outside of the control of any government:
- Major catastrophes,
- Changes in major currencies, such as the US Dollar,
- Innovation and technological advances, (usually it’s major international corporations who lead in this area), and
- Trade wars, major wars, or changes to international law, (usually it is superpowers such as China and US, or trading blocks such as the EU who lead in this area).
Probable outcomes, regardless of the election
When it comes to your hard-earned money, the election outcome matters a lot less than most people think. Regardless of what happens in the polling booths, it’s reasonable to expect that:
- Investment markets will stay volatile (have sometimes-large variations in price), but will reward patient investors by trending steadily onwards and upwards,
- Inflation will remain low for some years,
- Interest rates will remain low. This is good news for borrowers, but bad news for savers reliant on bank deposits and other cash deposits,
- Most NZ politicians will remain moderate in nature. They don’t seem to like reforming things, or implementing broadly unpopular decisions,
- After the election, a spell of uncertainty will occur as negotiations take place between small and large political parties. What is agreed to in these deals may cause some eyebrows to raise,
- NZ’s distance from the rest of the world and low population density should see us remain isolated from the worst of the immediate health impacts from Covid-19,
- The NZ economy will get through the current crisis: as a nation, we export a lot of food to trading partners we have good relations with,
- Some companies and industries will struggle, others will thrive. The same goes for the people employed in them,
- NZ’s unemployment will probably peak early in 2021, then start to recover,
- A very high NZ government deficit for at least the next two years. That is, the government spending a lot more than it takes in taxes,
- At some stage, all the government-borrowed money will need to be repaid by taxpayers, and
- Investment and property values will be volatile, but will grow due to the low rates of interest on borrowed money, plenty of newly printed money, and savers forced to invest instead of receiving paltry interest from the bank.
The bottom line
If you still have any concerns about how the elections might affect your investments and finances, simply get in touch and we can talk through potential personal impacts and solutions.